Shopify (TSX:SHOP) Swings to a Profit, Sending the Stock Soaring

Shopify Inc. (TSX:SHOP)(NYSE:SHOP) stock gains accelerate in 2019, as the company sees momentum and strength. But there are risks looming on the horizon, as the competitive landscape starts to heat up.

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Shopify (TSX:SHOP)(NYSE:SHOP) stock continues to break through to new highs, and on this day of its first-quarter 2019 earnings release, we are seeing the stock soar almost 10% to almost $330.

Shareholders are extremely happy, and investors who have stayed away from the stock increasingly feel the pain of missing out on one of the best-performing stocks of the last couple of years.

So, with this, earnings estimates have been increased, and we are all looking at the stock once again, trying to assess what the future holds for this tech stock.

Valuation is still high

Shopify’s valuation remains high, of course, but estimates are going in the right direction: up.

For 2019, the consensus estimate is now $0.47 (up from $0.40). But keep in mind that it is still below the previous estimate of $0.59. For 2020, it is now $0.89 (up from $084); for 2021, it is now $1.43 (up from $1.36).

Net new merchant additions in the first quarter were healthy, monthly recurring revenue was up 36% versus last year, and the company reported an adjusted net income per share of $0.09.

Clearly, Shopify continues to excel.

Should you buy?

While Shopify is seeing strong momentum in its stock price and its results, placing into question the bear case on the stock, it remains a risky proposition.

In terms of valuation, we cannot deny that this stock, along with many other high-growth, high-risk stocks, is trading at lofty valuations that seem to be filled with optimism without too much concern for the risks and without much attention to the less-optimistic case.

So, I would have to say that although the stock continues to soar, the downside risk increasingly looks higher than the upside potential.

The stock has rallied 79% year to date, has a $36 billion market cap, $1.5 billion expected revenue for this year, and trades at a price-to-sales multiple to 25 times. I know, this looks good compared to cannabis stocks, but it is still very high.

I don’t like this trade-off, but if you are prepared to take it, make sure you remain diversified and only put money here that you earmark for long-term potential gains.

Risks on the horizon

Recent developments are causing concern, as the competitive environment looks to be getting more intense.

Although Shopify is still sitting comfortably in its leading competitive position, moves from the likes of Facebook’s Instagram and from Mailchimp, a privately held firm out of Atlanta, aim to threaten its lead.

Facebook’s launch of Instagram Checkout, for example, is in direct competition to Shopify, and as the competitive landscape heats up, Shopify will certainly face headwinds as a result.

Final thoughts

In this world of high-risk, high-growth, sky-high valuations, Shopify has been a star performer.

We can enjoy the ride while it lasts, but taking profits, only adding on weakness, and being vigilant about risks and mounting threats will remain key to coming out ahead.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to its CEO, Mark Zuckerberg, is a member of The Motley Fool's board of directors. Fool contributor Karen Thomas has no position in any of the stocks mentioned. David Gardner owns shares of Facebook. Tom Gardner owns shares of Facebook and Shopify. The Motley Fool owns shares of Facebook, Shopify, and Shopify. Shopify is a recommendation of Stock Advisor Canada.

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